The Law of Unintended Consequences: Joint Ownership of Property under Jersey Law.
The Law of Unintended Consequences is a term used to describe outcomes not originally intended in a particular situation, which may have been both foreseen and unforeseen. These outcomes may be a positive unexpected benefit, a negative effect or a potential source of problems.
Robert K. Merton, a distinguished American Sociologist and the author of “The Unanticipated Consequences of Purposive Social Action” listed five possible causes of unanticipated consequences:
- Ignorance;
- Error;
- Immediate interests that override long term interests;
- Basic values that require or prohibit certain functions;
- Self-defeating prophecy.
Unintended consequences will always be an inherent danger in Estate Planning and Financial Advice. In many instances it may result in a positive unexpected benefit, which will make the Advisor look good, but it may also result in a negative effect or a source of problems. This may expose the Advisor or his Employer to claims for damages suffered if negligence played a part in the Advice.
Jersey Law recognises two forms of co-ownership being “ownership in common” and “joint ownership”. The presumption is for ownership in common unless expressly stated otherwise. “Joint ownership” plays an important role regarding Financial Advice in Jersey due to the inherent advantages of joint ownership in Estate Planning. An investment held in joint ownership passes to the surviving owner on the death of a joint owner without the necessity for a will or the appointment of an executor and probate. This on face value makes it a desirable option, especially for married couples.
So where does the unintended consequences play a role? Maybe the following hypothetical case study will explain:
Mr. A, a successful South African entrepreneur who worked all over the world, has successfully built up a substantial estate and subsequently retired with his wife on a golf estate in South Africa. Based on the advice of his Financial Advisor with whom he shares a drink every Saturday after his round of golf, he invested as much as legally possible into an Offshore Fund in Jersey held in a “joint account”, which his Advisor assured him was for Estate Planning Purposes only and similar to the joint signing powers on their South African cheque account and with no other consequences. This “joint account” would save all the hassle of an overseas will and estate duty on the investment. The Fund has performed really well, and now forms the basis of his riches, as he tells everybody who will listen, and gives due credit to the fantastic advice of his Advisor.
Now imagine the reaction of Mr. A when one morning early before his wife, whom he married out of community of property, sets out for her usual nine holes, tells him that as her regular playing partner, Mr B, has a much better short game than Mr. A, she will be moving in with Mr. B, and has already consulted a lawyer regarding the divorce. Mr. A recovers well from this piece of bad news, and quickly realises that with Mrs. A out of his hair and with the money in his offshore fund, he can actually travel the world and play all those golf courses he never had the time to play previously, so he gleefully points out to Mrs. A that as they are married out of community of property, everything they have as earthly possessions belong to him. He will immediately call his Advisor to remove her name from the “joint account” on the offshore investment, as it is his money after all, and she will leave with nothing but her suitcase of clothes, and he will be so gracious as to let her keep her golf clubs as well.
Mrs. A, however, is well prepared for this and smugly tells Mr. A that her lawyer has already taken advice regarding the Jersey investment, and the “joint account” is actually joint ownership, specified as such on the signed application form, so an equal share of the investment legally belongs to her. To make matters even worse, Mr. A cannot deal with any part of the investment without her agreement and participation, and should Mrs. A incur any debts, the investment could be executed to satisfy the debt! Guess who became the biggest villain, fool and enemy number one in that instant; the brilliant Advisor who never asked what the consequences of joint ownership in Jersey were and now had to explain the unintended consequence of transferring halve a share of the offshore fund to an unfaithful spouse.
So to summarise:
- Joint Ownership in Jersey has the effect of immediately transferring the investment as property of the joint owners in equal shares, will pass in full to the surviving owner on the death of a joint owner. A joint owner cannot transfer her/his share to someone else without the agreement and participation of the other joint owner, and a joint owner cannot encumber or give as surety her/his share without the agreement and participation of the other joint owner.
- Joint ownership can have unintended tax consequences such as Donations or Gift tax liability if the transaction is not exempt, and can also incur Estate Duty under certain circumstances.
- Joint Ownership is just one of the tools in Financial Advice and Estate Planning, and should only be used once the consequences have been considered and explained to the client, as Trusts or Foundations, although more cumbersome in the short term, may offer better outcomes in the long term.
The FirstRand Private Wealth Management International Advisory Service can provide more information regarding International and Cross Border transactions and investments.
Rudi Bodenstein, Legal Consultant: FirstRand Private Wealth Management Limited.
